Auditor General’s Annual Report 2004/05: hearing
Annual Report of Auditor General
28 November 2005
A summary of this committee meeting is not yet available.
AUDITOR-GENERAL AD HOC COMMITTEE
28 November 2005
AUDITOR GENERAL’S ANNUAL REPORT 2004/05: HEARING
Documents handed out:
Auditor-General’s Annual Report 2004/05 (please email email@example.com)
Committee Questions for Clarity on the Review of the Auditor General’s 2004/05
Auditor General’s Response to the Committee’s Questions Regarding the Annual Report 2004/05: PowerPoint Presentation
The Committee had sent 39 written questions to the Office of the Auditor General, which related to the Office’s 2004/05 Annual Report. During the meeting, the Office of the Auditor-General’s delegation presented a PowerPoint Presentation that outlined the Office’s responses to the Committee’s written questions. In the ensuing discussion, the Members had various follow-up questions on these matters:
• the schedule of compliance with the Public Audit Act;
• the audit reports that were not considered by the legislatures;
• the Office’s Code of Ethics;
• contracts that the Auditor-General awarded to auditing firms;
• the level of municipal compliance with submission timelines;
• reasons why the Auditor-General did not table certain special investigation reports;
• the implementation of the Minimum Qualifications Framework (MQF);
• the Office’s staff retention strategy;
• the results of the stakeholder satisfaction survey;
• the quality assurance levels; and
• the environmental audits.
The Chairperson also provided an update on the proposal for a Standing Committee over the Office of the Auditor-General.
Standing Committee on the Office of the Auditor-General
The Chairperson began by providing an update on the status of the Ad Hoc Committee. She noted that a letter had been sent by the Secretary of the National Assembly to the Chairperson of the Sub-Committee on the Review of Rules (Joint Rules Committee), which outlined issues surrounding the status of the Ad Hoc Committee. The letter stated that the Joint Rules Committee had agreed that a Standing Committee should be appointed as an oversight mechanism over the Office of the Auditor-General. Rule amendments would be drafted based on the proposals regarding the establishment of a Standing Committee on the Auditor General. These rule amendments would be circulated to the Speaker and political parties. Once this process was completed, the rules amendments would be tabled for adoption in the National Assembly. This would mean that the Ad Hoc Committee would cease to exist, and would be replaced by a Standing Committee.
Auditor General’s Response to the Committee’s Questions Regarding the Annual Report 2004/05
The Committee had forwarded 39 written questions to the Auditor-General regarding the Auditor-General’s 2004/05 Annual Report (see attached document). During the meeting, the Auditor-General’s delegation presented a PowerPoint Presentation that outlined the Auditor-General’s responses to the Committee’s written questions (see attached PowerPoint Presentation). The Committee’s questions and the Auditor-General’s responses generally related to:
- the schedule of compliance of the Auditor-General with the Public Audit Act;
- a breakdown of the 2003/04 audit reports that were not considered by legislatures;
- the Code of Ethics that existed in the Office of the Auditor-General;
- the details around the contracts that the Auditor-General awarded to Black Economic Empowerment (BEE) companies;
- the criteria for awarding contracts to audit firms;
- the issues surrounding local government audits;
- the issues surrounding national and provincial government audits;
- the reasons why the Auditor-General’s did not table certain special investigation reports;
- details around the Auditor-General’s internal leadership effectiveness study;
- details on the Auditor-General’s Employee Wellness Programme, including its HIV/AIDS programme;
- details of the Auditor-General’s staff retention strategies;
- details surrounding the Auditor-General’s implementation of the MQF requirements for its employees;
- the accessibility of the Auditor-General to potential trainee accountants;
- the issues surrounding the implementation of employment equity in the Office of the Auditor-General;
- issues surrounding the auditees satisfaction levels with the financial management capability model (FMCM);
- issues surrounding the quality of the Auditor-General’s services;
- whether the Auditor-General had the capacity to undertake environmental audits;
- and the impact the Auditing Professions Bill had on the Auditor-General.
Follow up comments, questions and answers relating to Question One: Schedule of compliance with the Public Audit Act
Mr E Trent (DA) noted that Chapter Three of the Public Audit Act required the Auditor-General to establish a stakeholder relationship with the proposed parliamentary oversight mechanism. Mr Trent asked whether the delegation could forward a document, which outlined the issues surrounding the need for the Auditor-General to establish a relationship with the proposed parliamentary oversight mechanism, to the Ad Hoc Committee. Mr T Nombembe (Deputy Auditor-General) responded that the Office of the Auditor-General would forward a document, which outlined the four or five policies that related to the oversight mechanism, to the Ad hoc Committee. Standards of auditing were one of the critical policies that were relevant to the work that the oversight mechanism would be conducting.
Mr Trent agreed that the standards of auditing were a critical issue. As a result, he asked the delegation to elaborate on the distinction between department’s capability models and their reporting capability.
Follow up comments, questions and answers relating to Question Two: Audit reports for 2003/04 not considered by legislatures
The Chairperson noted that it was disturbing that the Mpumalanga legislature had only managed to consider two of the twelve departmental annual reports that had been tabled with it in 2004. Mr C Botes (Office of the Auditor-General Parliamentary Senior Manager) acknowledged that the Mpumalanga legislature had not considered ten of the twelve reports that had been tabled with it in 2003/04. This was due to the fact that the Mpumalanga legislature had been involved in monitoring the Zimbabwe elections.
Mr L Gabela (ANC) and the Chairperson enquired whether there had been an ongoing problem with the Mpumalanga legislature. For example, had the Mpumalanga legislature experienced similar problems, of not considering all the annual reports that were tabled with it, in the years prior to 2004? Mr S Fakie (Auditor-General) responded that he would forward information regarding the performance of the Mpumalanga legislature prior to 2004 to the Committee.
Mr Botes stated that the Standing Committee on Public Accounts (SCOPA) had failed to consider thirteen of the thirty four departmental annual reports that it had received in 2004. This was due to the fact that SCOPA had an exceptionally heavy workload in 2004. Nonetheless, SCOPA had prioritised the annual reports that it had identified as important.
The Chairperson enquired whether SCOPA would deal with the thirteen reports in 2006. Mr E Trent (DA) responded that SCOPA would be linking these reports with the new annual reports. Mr Trent added that SCOPA’s operations had been disrupted in 2004 due to the national elections.
The Chairperson noted that the report of the Ad Hoc Committee needed to highlight the fact that SCOPA faced an enormous workload.
Follow up comments, questions and answers relating to Question Three: Code of Ethics
The Chairperson asked whether the Office of the Auditor-General possessed a Code of Ethics. Mr Fakie replied that the Code of Ethics of the Office of the Auditor-General had been reviewed by the Exco and the Auditor-General. The Office’s Code of Ethics covered aspects around the Code of Conduct, such as the professional conduct that was expected from staff. The Office’s Code of Ethics also adequately addressed the expectations of the Public Audit Act.
The Chairperson asked whether the Advisory Board was aware of the details of the Office’s Code of Ethics. Mr Fakie replied that the Auditor-General had only met the Advisory Board once. That specific meeting dealt with the terms of reference of the Advisory Board. A second meeting had been scheduled for the 14th of December. As a result, the Office’s Code of Ethics had not yet been forwarded to the Advisory Board.
The Chairperson commented that the Advisory Board needed to be aware of the details of the Code of Ethics. This would assist them in their work.
Follow up comments, questions and answers relating to Question Four: Statistics on contracts awarded to BEE firms
Ms Fubbs noted that the Auditor-General made a distinction between medium-sized enterprises and small and medium sized enterprises (SMMEs). She asked what the difference was between medium-sized enterprises and SMMEs. Mr Nombembe acknowledged that the terminology that the Auditor-General used around SMMEs was confusing. The Auditor-General used the term SMMEs to refer to small enterprises, rather than to refer to small and medium sized enterprises. Hence, the SMME category, as used by the Auditor-General, was different to the medium sized category, as used by the Auditor-General. The distinction between small enterprises and medium enterprises was based on the number of partners and trainee accountants that were employed at the enterprises.
Follow up comments, questions and answers relating to Question Five: Criteria for awarding contracts to audit firms
Ms S Rajbally (MF) asked what the minimum score was that a firm needed to attain to be awarded a contract from the Auditor-General. Mr Fakie responded that there were different minimum scores for firms in the different provinces. This was due to the fact that auditing firms were scarce in certain provinces. Firms in Gauteng and KwaZulu-Natal, where auditing firms were not scarce, had to score at least 50 points to receive a contract. However, firms in the North West and Limpopo, where auditing firms were scarce, only had to score 33 points to receive a contract from the Auditor-General.
Mr Fakie added that the process of awarding contracts was open and transparent. Firms tendering for contracts were required to provide specific information that related to the criteria of BEE and service quality. As part of the contract awarding process, the Auditor-General would call the various tendering firms together and score them in the presence of each other. The firms that scored adequate points would then be awarded the contracts. A firm would not receive a contract if they did not score the minimum number of required points.
Mr Trent and Mr Johnson asked whether the Auditor-General had the capacity to evaluate the quality of the work of the contracted audit firms. Mr Trent observed that the Office of the Auditor-General contracted work out because it lacked the capacity to undertake the work itself. As a result, it must be difficult for the Office Auditor-General to evaluate the quality of the work that was being conducted by the contracted auditing firms.
Mr Fakie responded that the Auditor-General signed all the audit reports, even if they had been contracted out. Hence, the Auditor-General took responsibility for the work that was undertaken by the contracted auditing firms. Indeed, the firms that were undertaking the contract work were acting as extensions of the Office of the Auditor-General.
Mr Fakie added that an audit controller from the Office of the Auditor-General would be responsible for monitoring the work that a contracted audit firm was undertaking. The audit controller would also undertake quality control reviews of the contracted audit firm’s work. The audit firms that undertook work for the Office were subjected to the same internal quality control mechanisms as Office employees. Added to this, all the contracted firms were required to produce audit plans. These plans were reviewed by the Auditor-General’s audit controllers. This ensured that the quality of the contracted audit firms’ work was effectively monitored.
Mr Fakie noted that the Office of the Auditor-General also assisted contracted audit firms to improve the quality of their work, if they had experienced quality problems. However, if a contracted firm continuously produced poor quality work, its contract would be terminated.
Mr Fakie commented that the Public Audit Act allowed the Auditor-General to choose whether to conduct an audit of a public entity. If the Auditor-General selected not to audit a public entity, that public entity could appoint an external auditor of their choice. Nonetheless, the Auditor-General was still required to approve the external auditor. In addition, the Public Audit Act stipulated that the external auditor would have to comply with the Auditor-General’s standards.
Mr Johnson asked why the Auditor-General would choose not to audit a public entity. Mr Fakie explained that under the previous Act, the Auditor-General did not have the power to audit some of the entities that were listed in the Public Finance Management Act (PFMA). Indeed, under the old Act, certain public entities were allowed to appoint their own external auditors without the approval of the Auditor-General. It was, therefore, extremely difficult for the Auditor-General to conduct an audit at such entities. Some Members of Parliament had expressed concern about this, because they felt that these entities were not being held accountable. For this reason, the Public Audit Act was amended to enable the Auditor-General to conduct audits, if it selected to, within these public entities. However, the Office of the Auditor-General lacked the capacity to undertake an audit at every public entity. Due to this, the Auditor-General could select not to audit certain public entities. Nevertheless, the provisions in the Public Audit Act ensured that these entities, even if they were audit by private companies, were audited to the Office’s standards.
Ms Fubbs noted that the Auditor-General would not provide a contract to a company that had a conflict of interest. However, what happened in the provinces that had very few audit firms? Due to a small pool of auditors, would the Auditor-General award a contract to a company that was also doing accounting work for government departments? Perhaps the Auditor-General’s conflict of interest policies had to be relaxed in provinces where there were few auditing firms.
Mr Fakie acknowledged that conflicts of interest were as a major challenge in the provinces where there were few auditing firms. In order to address this, the Auditor-General examined how possible conflicts of interest could be avoided. For example, if an audit firm had done accounting work for a specific government department, they would not be permitted to be involved in auditing that department. However, the same firm would be allowed to audit another government department, which they not worked for. Through this, possible conflicts of interest were avoided.
Follow up comments, questions and answers relating to Question Six: Level of municipal compliance with submission timelines
Mr Fakie noted that although 52% of municipalities had submitted their financial statements on time in 2004/05, the Auditor-General still needed to undertake a study on the quality of these reports. One could possibly find that the quality of municipalities’ financial statements had suffered due to the rush to meet the deadline. Nonetheless, if any of the reports of the municipalities were not up to standard, they would receive a qualified report or they would be required to resubmit their reports.
Mr Johnston asked what steps were taken against municipalities that had not submitted their financial statements on time. Mr Fakie replied that the Municipal Finance Management Act required the Auditor-General to table a report in Parliament, which listed the municipalities that had failed to submit their financial statements on time. This placed pressure on the municipalities to submit financial statements on time.
Follow up comments, questions and answers relating to Question Seven: Reasons why municipalities do not supply information in good time
Mr Ayisa asked whether late submissions of the municipalities’ financial statements were due to capacity problems. Mr L Zita (ANC) enquired whether the National Treasury or the Auditor-General had any programmes to build the accounting capacities of the municipalities. Mr Fakie responded that the National Treasury and the Department of Provincial and Local Government had undertaken a number of initiatives to build the accounting capacity of the municipalities. Indeed, Project Consolidate was aimed assisting municipalities that lacked resources.
Follow up comments, questions and answers relating to Question Ten: Reasons for non-tabling of
special investigation reports
Mr Trent commented that, as he understood it, the special investigative reports that were not tabled did not contain substantive matters.
Mr Trent observed that the Office of the Auditor had conducted special investigations around misconduct and business process reviews. He asked the delegation to explain the distinction between misconduct and the business process reviews. Mr Nombembe replied that special investigations into misconduct were performed when individuals were suspected of some form of serious misconduct. Special investigations into business process reviews were undertaken when it was suspected that business processes had not been properly followed.
Mr Ayisa commented that the Ad Hoc Committee should be provided with a list of all the special investigations, which were of public interest, that been conducted by the Auditor-General. This list should also contain the details and scope of these investigations. Mr Fakie replied that the Office would forward such a list to the Committee. However, Mr Fakie added that entities approached the Auditor-General to conduct special investigations. The aim of the investigations was to allow entities to strengthen their management capacity or to deal with misconduct. If entities felt that they would have to answer to Parliament regarding issues that were raised in the special investigations, they might no longer be willing to call the Auditor-General to conduct special investigations. There needed to be a balance. Nonetheless, all the special investigations that contained issues of high public interest were tabled in Parliament.
Follow up comments, questions and answers relating to Question Twelve: Strategic alignment performance target
Ms Fubbs noted that when the Office was initially established, it had set its strategic alignment performance target at 50%. She enquired whether this target of 50% would be reviewed. Perhaps the Office should raise the target to 65%. Mr Nombembe replied that a study was being conducted into what would constitute an appropriate level for the strategic alignment performance target.
Follow up comments, questions and answers relating to Question Fourteen: Reasons for Low Pass Rates
Ms Fubbs observed that the Office of the Auditor General provided bursaries to full-time and part-time accounting students. The pass rate of the full-time students was 27%, while the pass rate of the part-time students was 34%. She noted that the Office had stated that it would shift towards funding full-time students. However, the pass rate for the full-time accounting students was lower than that of the part-time students. In the light of this, she asked why the Office had decided to shift towards funding full-time accounting students.
Mr Nombembe responded that offering financial assistance to full-time accounting students had initially been undertaken as a pilot project. The funding for the project had come from the Office’s reserves. The aim was to enhance human resource development in the Office. The Office had learnt many valuable lessons from the pilot project. Indeed, the experience that it had gained had allowed it to improve the structure of the project. The Office would also be using stricter selection criteria in the future.
Ms Fubbs and Mr Zita enquired whether a study had been conducted to assess why there had been such a low pass rate. Mr Nombembe replied that one of the reasons for the low pass rate was that the Office had used poor selection criteria. The Office would be improving its selection criteria in the future. This would enable the Office to select the right people to study further.
Ms Fubbs enquired whether the Auditor-General was providing any practical assistance to increase the pass rate. For example, did the Office provide affective study leave to its employees/students? Mr Nombembe responded that the Office was funding the costs of the employees’/students’ study support programme. The study support programme trained the employees/students in exam techniques. Some of the Office’s staff also volunteered to tutor the individuals that had received bursaries. Mr Fakie added that the Office allocated time for its employees/students to participate in study programmes.
Follow up comments, questions and answers relating to Question Seventeen: MQF effectiveness
Ms Fubbs asked whether the Office’s staff had been given sufficient time to acquire MQF qualifications. Mr Nombembe replied that the Office had introduced the MQF in 2000. Hence, its employees had ample time to ensure that they complied with the MQF. Nonetheless, some of the staff had felt that the issues surrounding the implementation of the MQF were confrontational. As a result, the Office was providing support to its employees to reach the MQF level.
Ms Rajbally observed that some of the Office’s staff had not obtained MQF qualifications. Did this impact on the conditions of their employment? Added to this, she asked whether employees were being offered training opportunities by the Office to ensure that they attained MQF qualifications. Mr Nombembe replied that if an employee did not achieve the MQF level within the contracted period, their conditions of employment would be affected. Mr Fakie noted that employees could gain formal MQF qualifications through Recognition of Prior Learning (RPL). Hence, not all Office employees would have to formally study to obtain a MQF qualification. However, new recruits into the Office needed to meet the MQF requirements.
Follow up comments, questions and answers relating to Question Eighteen: Staff Retention Strategies
Mr Trent asked why there was a high staff turnover rate in the Office. Mr Fakie replied that the introduction of the MQF had contributed towards the Office’s high staff turnover rate. Added to this, the Office’s employees were often recruited by other government departments and entities.
Mr Trent noted that the Office of the Auditor-General had recruited a large number of trainee accountants in order to encourage young people to become public entity auditors. He asked whether this was part of the Office’s strategy to provide auditors to other public entities and departments. Mr Nombembe replied that the Office did focus on training auditors for the entire public sector.
Mr Johnson asked whether the Office had any strategies to ensure that it retained the employees that it had assisted with training. Mr Nombembe responded that there were many white people that were in management positions in the Office. The Office was contracting these people for three to five years. This would mean that there would be openings for the present black trainee accountants to move into management positions within the next three to five years. This would ensure that the Office’s best black trainee accounts would be retained.
Follow up comments, questions and answers relating to Question Twenty Four: Affirmative action target
Mr Nombembe noted that the Office’s initial affirmative action target was to ensure that 55% of its employees were from the designated groupings. The Office had bettered this target. He added that during phase two of the affirmative action target, the Office would be working towards ensuring that its staff profile reflected the general demographic profile of the population.
Follow up comments, questions and answers relating to Questions Twenty Six, Twenty Seven, and Twenty Eight: Stakeholder satisfaction results
Ms Fubbs noted that a survey had been conducted, through questionnaires, to assess the stakeholders’ views of the Auditor-General’s service. She asked what percentage of the stakeholders had returned the questionnaires. Mr Fakie replied that the percentage of returns was fairly high.
Ms Fubbs observed that the results of the stakeholders’ satisfaction survey had varied dramatically year to year. Was this discrepancy due to the different survey methodologies that had been used from year to year? Mr Nombembe acknowledged that the survey methodologies had differed from year to year. This could be one of the reasons why the results of the survey differed from year to year.
Follow up comments, questions and answers relating to Questions Twenty Nine and Thirty: Quality Assurance Levels and Future Plans
The Chairperson commented that the drop in the quality assurance levels was concerning and needed to be addressed. The Committee would want to the see results of the actions that the Auditor-General had undertaken to rectify the drop in quality assurance levels. Mr Nombembe replied that in the past, the Office assumed that its auditors knew how to conduct an audit. The implementation of the MQF would address this assumption. Indeed, the MQF would ensure that its auditors were competent. The Office would be addressing the root causes of the decline in the quality assurance levels.
Mr Trent asked whether the quality assurance levels would improve by the end of 2006. Mr Nombembe replied that the quality assurance levels would improve by the end of 2006.
The Chairperson noted that an immense amount of time and resources had been spent to ensure that the skills levels and general operations of the Auditor-General were continuously improved. However, the decline in the quality assurance levels defied this. At some stage the effort that had been placed into improving the Office would impact positively on the quality assurance levels.
Mr Trent questioned whether the 70% target for the quality assurance levels was realistic.
Follow up comments, questions and answers relating to Question Thirty Seven: Environmental audits
Mr Zita asked the delegation to provide a definition of environmental auditing. Mr Fakie replied that environmental auditing was a new concept in both the public and private sector. In the public sector, as part of environmental auditing, the Office was responsible to examining whether the government was complying with the environmental accords that it had signed. South Africa had also been nominated to drive environmental auditing in Africa. South Africa, however, dealt with very different environmental issues when compared with the First World. For example, South Africa was examining issues around water supplies, waste management and water quality.
The Chairperson commented that the private sector would also have to conduct environmental audits.
Mr Zita asked whether the Committee could receive details on the methodology, which was being used to conduct environmental audits. The Chairperson responded that a number of the large auditing firms were producing surveys on sustainable investment reporting. The current Joint Ad Hoc Committee on Corporate Governance [part of Parliament's African Peer Review Mechanism] had access to a number of documents that related to sustainability reporting. Indeed, these documents related to sustainability in terms of the environment, human resources, and the economy.
The Chairperson noted that the Ad Hoc Committee would be dealing with the Auditor-General’s budget and strategic plans on the 29 November.
The meeting was adjourned.
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